Brazil faces the possibility of widespread energy rationing for the first time since 2001, as a hot, dry summer has deprived hydroelectric dams of needed water while boosting power use to run air conditioners in sweltering cities.

Even if the country escapes rationing, electricity experts say it may have to boost use of thermo-electric power - a more expensive option which could undermine President Dilma Rousseff's plans to lower energy rates.

Energy Minister Edison Lobao said the extra cost of diesel-fired plants would add less than 1 percent to consumers' electric bills during the months they are in use, ruling out the possibility of new government controls.

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"There is no chance of rationing, no chance of shortages," Lobao said in an interview on the Globo television network.

On Monday, Brazil's stock market shed 1 percent as rationing fears intensified. Depending on how Rousseff handles the shortage - and whether it rains in the next few weeks - the fallout could impair Brazil's ability to hit its inflation goal in 2013 and damage growth in an already stagnant economy.

Several big cities already experienced long blackouts late last year. Rationing would cause particular disruptions for the country's large, power-hungry mining and metallurgical sector.

In late December, Rousseff dismissed the idea of rationing or a power crisis as "ridiculous".

But on Monday, Folha de S.Paulo newspaper reported that the president has called an emergency meeting of energy officials on Wednesday to discuss the situation. Government officials toldReuters the meeting of a committee that monitors electricity supplies was previously scheduled.

Brazil's mostly "green" hydroelectric power sector, which accounts for 67 percent of its electricity supply, has been the envy of countries dependent on dirtier and more costly sources of power. But low water levels and dry climate are now showing the vulnerability of depending on hydro-power.

Due to environmental restrictions, Brazil's newer hydroelectric dams have smaller reservoirs that are more vulnerable to changes in climate and drought.

Energy shortages and deficient infrastructure, which caused widespread blackouts in Latin America's largest nation last year, are a sensitive issue for left-leaning Rousseff, who as energy minister a decade ago was charged with making sure rationing never happened again. An energy crisis on her watch would dent her very high approval ratings.

The southern hemisphere summer is usually Brazil's wettest season, but not this year. In the poorer northeast of the country, lack of rain has hurt corn and cotton crops, wiped out a third of sugar cane production and left cattle and goats to starve to death in dry pastures.

CRITICAL RESERVOIR LEVELS

Brazil's private sector is growing increasingly anxious.

Shares in major power utilities traded on Sao Paulo's BM&FBovespa fell 2.5 percent on Monday over concerns that rationing would be implemented as water levels at hydroelectric dams dip near critical levels.

According to the national grid operator ONS, hydroelectric reservoirs in the populous southeast industrial hub of Brazil are operating at 28.8 percent of capacity, and those in the northeast are at 31.61 percent of capacity. Some reservoirs only have enough water to operate for another six weeks.

"Let's hope for rain in January or February, because reservoir levels are at their lowest in 10 years," said energy expert Adriano Pires of the Brazilian Center for Infrastructure. "If there is little rain and economic growth recovers, we are bound to have rationing before the end of the year."

While forecasters expect rain in the south, the Northeast is suffering its worst drought in decades, threatening hydro-power supplies in an area prone to blackouts and potentially slowing economic growth in an emerging agricultural frontier.

Power consumption shot up in recent weeks due to hot weather that boosted air conditioner use.

GAS POWER AND HIGHER PRICES

Even though there are no estimates of the size of the energy shortfall, private players on Brazil's open electricity market are already factoring energy rationing into their projections.

"The chance of not having rationing is small. The situation is ultra-critical," one power sector executive told Reuters last week. He added that his company has factored in a period of rationing into its planning for the year. The executive spoke on condition of anonymity due to the sensitivity of the matter.

Mauricio Tolmasquim, head of the federal energy research institute EPE and a close associate of Rousseff's, said in a radio interview there was no risk of an energy shortage, noting gas-fired generators were on hand as a backup.

Brazil generates 18 percent of its electricity with gas, which is imported by state-run oil giant Petrobras, energy expert Pires said. He added that the company is paying a high price for imported liquefied natural gas (LNG).

Petrobras has stepped up imports of LNG with two cargoes from Norway and the United States arriving at a northeast terminal so far in January, Reuters ship tracking data showed on Monday.

The energy ministry last week granted a natural gas import license to the Uruguaiana thermoelectric plant in Rio Grande do Sul state, which is owned by AES Brasil and has been at a standstill since 2009 when Argentina cut off gas supplies. If Argentina does not reopen the gas pipeline valve for Uruguaiana, the plant will have to rely on LNG shipments from abroad.

Brazil imposed power rationing in 2001 and temporarily cut supplies to homes that exceeded the limit, severely crimping economic growth that year. Businesses that lowered consumption were rewarded.

Brazil is susceptible to power crises caused by drought. The one in 2001 caused huge economic and political turmoil, with rationing for the better part of a year and a multibillion-dollar push to build gas-fired thermal plants.

Brazil's electricity sector has grabbed headlines in the past six months after the government imposed significant cuts on the price of power to consumers. Power generating firms and distributors have said that could undermine investment.

Analysts at BTG Pactual Group say the hydropower reservoir scenario looks more "delicate" than it did in 2000, just a year before energy rationing. But Brazil's thermal capacity is now twice as big as in 2000 and major projects such as MPX Energia SA's thermal plants and the Jirau and Santo Antonio hydro plants are coming onstream soon, a BTG Pactual note to clients said.

Higher electricity prices are more likely than rationing since thermal plants will be used more throughout the year, and rates could rise by as much as 14 percent, BTG Pactual said.